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Incomplete Contracts, Limited Liability, and the Optimality of Joint Ownership

Patrick Schmitz

No 13881, CEPR Discussion Papers from C.E.P.R. Discussion Papers

Abstract: The property rights approach to the theory of the firm is the most prominent application of the incomplete contracting paradigm. A central conclusion of the standard model says that joint ownership is suboptimal. In this note, we analyze a modified version of the standard model that is tailored to the organization of R&D activities, where one of the parties is wealth-constrained and protected by limited liability. It turns out that joint ownership can be optimal, since it avoids wasteful rent-seeking activities when limited liability rents are necessary to induce high effort. Our results are in line with the fact that R&D activities are often conducted in research joint ventures.

Keywords: Incomplete Contracts; joint ownership; limited liability; Property rights; rent seeking (search for similar items in EconPapers)
JEL-codes: D23 D86 L24 L25 O32 (search for similar items in EconPapers)
Date: 2019-07
New Economics Papers: this item is included in nep-com, nep-cta and nep-mic
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Journal Article: Incomplete contracts, limited liability, and the optimality of joint ownership (2019) Downloads
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